Don’t Read Too Much Into Weak ISM Employment Data – RBS

By Michael Aneiro

Markets so far seem to be interpreting today’s weak ISM service-sector index reading – particularly the dreadful employment component, which contracted for the first time in over two years – as a harbinger of further disappointment when the Labor Department releases its February nonfarm payrolls report on Friday. RBS isn’t so sure:

The sharp drop in this series will likely stoke fears of a weak employment report on Friday, but we would caution against taking the decline at face value (and we are sticking with our forecast for a 130,000 rise in payrolls on Friday). The employment index was running well above where service sector payrolls actually printed in December and January, so the February decline could reflect some catch-up. Indeed, the employment component averaged 55.3 in October and November, when payrolls excluding manufacturing and government averaged 238,000. In December and January, as payrolls excluding the factory and public sectors cooled to an average of just 87,000, the ISM non-manufacturing index actually accelerated, averaging 56.0. So, it seems like the employment index was due to soften, but the magnitude of the decline likely overstates the degree of slowing in service sector hiring.

In fact, the nine point monthly drop in the employment gauge is the largest since November 2008, when the economy was in free-fall following the collapse of Lehman. The current situation is clearly nothing like what we faced in late 2008, so we would take the fall in the employment measure with a grain of salt. Finally, we would note that February presents the toughest hurdle all year in terms of the seasonal factors for employment. The employment index has failed to rise in each of the prior two Februarys, due in part to the stringent seasonal factor.

Treasuries continue to hold steady approaching midday, with the 10-year yield still unchanged at 2.69% and the 30-year yield down just a bit at 3.632%, per Tradweb data.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.